The Securities and Exchange Commission today announced that Manisha Kimmel will serve as Senior Policy Advisor for Regulatory Reporting to Chairman Jay Clayton. In this new role, Ms. Kimmel will coordinate the SEC’s oversight of the self-regulatory organizations’ (SROs) creation and implementation of the Consolidated Audit Trail (CAT). Ms. Kimmel will work closely with the Division of Trading and Markets and other divisions and offices on the CAT and other regulatory reporting matters.

In the wake of the 2010 “Flash Crash,” the Commission adopted a rule that requires the national securities exchanges and FINRA (collectively, the SROs) to work together to develop and submit to the SEC a plan to create, implement and maintain a CAT. The CAT is designed to provide a single, comprehensive database that, when fully implemented, will allow regulators to more efficiently and accurately track trading in equities and options throughout the U.S. markets. The CAT is intended to, among other things, allow the Commission to better carry out its oversight responsibility by improving its ability to reconstruct trading activity following a market disruption or other event, which in turn would allow the Commission to more quickly understand the causes of such an event and respond appropriately.

Jay Clayton, SEC Chairman

“Manisha knows the value of orderly, deep, and transparent markets to our investors and our country, and I am grateful that she has decided to take on this new, important role,” said Chairman Jay Clayton. “I am confident that her extensive experience and expertise in market data and regulatory reporting will further enhance the Commission’s ability to effectively oversee the SROs’ implementation of the CAT.”

“I am honored to have been chosen by the Chairman to advise him on matters related to the SROs’ implementation of the CAT, and I look forward to working with the SEC’s talented staff on these important topics,” said Ms. Kimmel.

Kimmel joins the SEC from Refinitiv, where she served as Head of Regulatory and Compliance, Wealth Management. In addition to her role at Refinitiv, Ms. Kimmel served on the Advisory Committee for CAT NMS LLC, a diverse group of industry experts that offers advice to SROs on technical specifications, reporting functionality, and other matters relating to the CAT. She has previously been a member of the SEC’s Equity Market Structure Advisory Committee (EMSAC). Prior to her time at Refinitiv, Ms. Kimmel served as Managing Director of the Financial Information Forum, where she worked with broker dealers, exchanges, and vendors on issues involving regulatory and market data technology issues. She has also held positions at Jordan & Jordan and Automatic Data Processing. Ms. Kimmel earned her B.S. in Economics from the Wharton School of Business at the University of Pennsylvania and her B.S. in Engineering from Penn’s School of Engineering and Applied Sciences.

“Our Examination and Risk Monitoring program is central to our efforts to protect investors and guard the integrity of markets. After careful consideration and extensive feedback from internal and external stakeholders, we are moving toward a program structure that is based on the firms we oversee. By directing our expertise and resources in a more tailored way, we will become more effective at examining for compliance,” said FINRA President and CEO Robert W. Cookat the time of the original announcement. “Bari brings valuable perspective to her role at the helm of this transformation and, under her leadership, we have begun to create and implement a roadmap that thoughtfully and methodically builds towards the new structure.”

Havlik recently comes to FINRA with thirty years of compliance experience; she spent fourteen years as the Chief Compliance Officer at Charles Schwab.

She noted that in dealing with FINRA from the corporate end, a great FINRA strength was that it had a deep understanding of the firms they regulate, along with listening to their member firms.

Its main weakness was a lack of coordination, specifically Havlik said, there was a lack of coordination in these three examination teams, and this was the main reason for the consolidation.

She said the three examining teams would make duplicate requests for information, and sometimes, there would be two different conclusions from two different teams.

Havlik also said there would be an enhanced commitment of a program that FINRA Chief Robert Cook implemented in January 2017, FINRA 360.

FINRA 360 is, “a comprehensive self-evaluation and organizational improvement initiative…to ensure that FINRA is operating as the most effective self-regulatory organization (SRO) it can be, working to protect investors and promote market integrity in a manner that supports strong and vibrant capital markets.” According to the FINRA site.

“It (FINRA 360) will be part of our DNA.” Havlik said.

With that, Havlik talked more about a progress report released for FINRA 360 in April 2018.

The progress report found that the examinations had improvements in: enhancement to their risk based programs, enhancements to information sharing, and improving processes for information requests.

Bari Havlik, Executive Vice President for Member Supervision at FINRA

Havlik said “it takes them to the next level,” referring to the consolidation of the offices continuing to build on improvements.

FINRA is a self-regulatory organization which governs trading on the NYSE and NASDAQ.

It was formed in 2007, when the regulatory arms of each exchange merged.

FINRA examinations are part of the compliance program for each firm which is a member of FINRA must do regularly.

FINRA notes on its site: “FINRA regularly examines all firms to determine compliance with FINRA’s rules and those of the SEC and the Municipal Securities Rulemaking Board (MSRB).

“During a routine examination, FINRA examines those aspects of a firm’s business that present heightened regulatory risk, as well as certain core areas. Specifically, FINRA examines a firm’s books and records to see if they are current and accurate. FINRA analyzes sales practices to determine whether the firm has dealt fairly with customers when making recommendations, executing orders, and charging commissions or markups and markdowns; and scrutinizes a firm’s anti-money laundering program, business continuity plans, and financial integrity and internal control programs. Similarly, firms go through a rigorous review for financial and operational compliance.”

“The SFAC provides guidance to FINRA staff, particularly regarding the potential impact of proposed regulatory initiatives on FINRA’s small firms.” FINRA noted at the time of the announcement. “The SFAC meets five times a year, primarily in Washington, DC, prior to each FINRA Board of Governors meeting. SFAC members are expected to attend SFAC meetings in-person and may be requested to attend certain regional meetings or other FINRA meetings. Potential candidates should ensure that their other commitments will allow for their in-person attendance at all SFAC meetings.

“Any eligible candidate wishing to have his or her name added to the ballot must submit the relevant information via the candidate profile form to the Corporate Secretary of FINRA no later than Friday, September 28, 2018. The candidate profile form is available online at www.finra.org/notices/SFACElection/082918 and as an attachment to this Notice.

“On or about Tuesday, October 16, 2018, FINRA will mail the official Election Notice and ballots to the executive representatives of small firms in the North and West Regions. Voting will conclude in November 2018. The newly elected North and West Region representatives will take office in January 2019.”

Lanton noted that the SFAC specifically contributed to affecting a FINRA rule recently: The Continued Membership Application process was proposed to be changed and Lanton noted the committee believed it was “too difficult to navigate” and FINRA “tweaked things a little bit,” as a result.

Lanton also said the SFAC which has been lobbying Congress to get exemptions from certain auditing requirements.

“Several years ago, it was mandated that small firms get PCAOB accounting firms to do their auditing. Audit prices went through the roof and small firms were left scrambling to find a PCAOB firm they could afford,” Lanton told Jones.

PCAOB stands for Public Company Accounting Oversight Board and such audits, Lanton noted, were time consuming and expensive and so small broker/dealers, along with some of the SFAC, have been lobbying Congress for an exemption.

Indeed, earlier this week, the House Financial Services Committee passed the Small Business Audit Correction Act, which would do just that.

Lanton also noted that the SFAC has created a sub-committee to study and provide ideas to resolve unpaid arbitration awards.

FINRA is a self-regulatory organization (SRO) and is a regulator to firms which trade on the NYSE/NASDAQ.

Shaikin noted that during this process the SEC will put the proposed rule in the federal register, which creates another round of public comment.

“Again, FINRA staff will look at those comments, make any amendments that we think is (sic) appropriate.”

Once a rule is finalized, FINRA normally puts out a note in another regulatory notice “that will also typically include the implementation date and increasingly a guidance in the form of FAQs.”

Sokobian said that public feedback is critical to good rule making: “Often, when we’re developing rules we come from the perspective of what we know, what we hear; we go out, we talk to people. We go through this process that Phil’s talked about. Often there are pieces that we may not know all the information we need to know. We go out; we ask questions; we seek feedback.”

In 2014, FINRA began a process to retroactively review their implemented rules.

Sokobian noted that his and Skaikin’s office have worked in partnership to create a proper review process.

“To have an effective review, you have to be willing at lots of different things. You can’t look at the economics without thinking about what the law says, what the law is trying to do.” Sokobian said. “You can’t expect a rule that was written thirty-five years ago to be well calibrated for the world today.”

FINRA regulates trading on the NYSE and NASDAQ; it was created when the rulemaking arm of both exchanges merged on July 26, 2007.

It is called a Self-Regulatory Organization or SRO.

Another example of SRO’s in America are the American Bar Association and the American Medical Association, both of which license lawyers and doctors.

While the ABA and AMA do not have an overseer, as Shaikin noted, the SEC has veto power over FINRA rules.

The National Futures Association is another SRO, which registers futures dealers, and it too is required to submit all their proposed rules to both the SEC and CFTC, according to its website.

It has fourteen committees which “offer guidance on its rulemaking and other initiatives.” Also according to their site.

“As part of Gemini’s mission to build the future of money, we believe in the importance of thoughtful regulation in the virtual currency industry. Starting in 2014, we worked with the New York State Department of Financial Services (NYSDFS) to obtain a trust company license for Gemini’s exchange and custody business. In 2017, as part of the development of the Cboe Bitcoin (USD) Futures Contract, we entered into an Information Sharing Agreement with the Cboe Futures Exchange (CFE), owned by Cboe Global Markets, Inc. (Cboe) and registered with the Commodity Futures Trading Commission (CFTC), to allow CFE to perform cross-market surveillance of Gemini’s marketplace. Lastly, we have adopted an internal Trading Policy with respect to material nonpublic information, as well as Marketplace Conduct Rules for all trading on our marketplace, in an effort to foster a rules-based marketplace.

“With that said, there has been recent discussion among U.S. regulators and legislators about the need for further oversight and self-regulation of the virtual currency industry. When evaluating this need, it is important to first note that the term virtual currency (often used interchangeably with the terms “digital asset,” “digital currency,” or “cryptocurrency”) can refer to different asset types including virtual commodities like bitcoin, and separately, tokens built “on top of” blockchains that are securities (i.e., “security tokens,” which are sometimes issued via initial coin offerings (ICOs)). The legal status of bitcoin as a commodity was established by the CFTC in the 2015 order against Coinflip, Inc. This order stated that “Bitcoin and other virtual currencies” fall under the definition of a “commodity” as defined in Section 1a(9) of the Commodity Exchange Act of 1936 (CEA). This was recently confirmed by the U.S. District Court for the Eastern District of New York. As a result, virtual commodities like bitcoin (as a group, these are referred to in this document as “virtual commodities”) are “exempt commodities,” which is the same category in which the CFTC places metals and energy commodities, including gold, silver, oil, and natural gas. The cash markets (or spot markets) for exempt commodities, including virtual commodities, do not fall under the jurisdiction of the CFTC; however, the CFTC does have fraud and manipulation enforcement jurisdiction over these markets and market participants under the CEA. The legal status of whether or not a token is a security (i.e., not a virtual commodity) is determined by the Securities and Exchange Commission (SEC), which has traditionally been guided by the Howey Test and other SEC enforcement precedent when making these types of determinations. Unlike virtual commodities, security tokens and cash markets for security token transactions fall under the direct jurisdiction of the SEC and the federal securities laws, rules, and regulations.”

The Winklevoss twins have been making a great deal of noise related to digital currency recently.

The story went on to note: “They also built a lucrative New York-based cryptocurrency exchange, Gemini, where investors can buy and sell digital currencies. Before opening the trading platform in 2015, the ‘Winklevii’ worked closely with New York regulators. ‘Our philosophy is to ask for permission, not forgiveness,’ Cameron Winklevoss has said.”

“Ultimately, a virtual commodity SRO that has the most independence from its membership, the most diversity of views, and the strongest ability to discover, reveal, and punish wrongdoing will add the most integrity to these markets. I encourage Gemini (or any other market participant, advocacy group, platform, or firm) to be aggressive in promoting these qualities within any SRO construct.”

Last week, while speaking at the Blockchain Summit, Quintenz also suggested it was time for an SRO to regulate digital currency.

An SRO is a creation of the government but functions independently. The Financial Industry Regulatory Authority (FINRA) is an example of an SRO in the trading world.

“I also expressed my willingness to explore how a new, private independent organization could perform an oversight function for U.S. cryptocurrency platforms. For example, we see this model working today through the National Futures Association (NFA) and the Financial Industry Regulatory Authority (FINRA). Currently, a patchwork of state and federal regulators have jurisdiction over the cryptocurrency industry. In my opinion, the area with the greatest need for enhanced regulatory certainty and oversight is the spot market. Today, state regulators and the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) regulate cryptocurrency platforms as money service businesses.16 While cryptocurrency exchanges can resemble traditional money transmission services, there are enough differences to warrant different regulatory treatment. As Congress works with federal and state regulators to determine the appropriate regulatory framework for cryptocurrencies, I believe an SRO-like entity could develop industry standards that could inform, or even serve as a blueprint for, future action.

“Indeed, we are already seeing a movement toward self-regulation in the cryptocurrency sector. A cryptocurrency trade association called ‘CryptoUK’ was recently established in the United Kingdom. The organization has established a code of conduct for its members which includes guidelines around due diligence checks, customer protections, and pricing transparency. Similarly, the heads of two cryptocurrency trade groups in Japan, together with the country’s 16 spot exchanges, have committed to establishing a new self-regulating body. In the United States, efforts toward standardization are also underway at the state level. Seven states have agreed to recognize each other’s money service business licenses and a model state virtual currency law has been published.

“I think an independent, self-regulating body for spot platforms in the United States could significantly contribute to these ongoing efforts to rationalize and formalize cryptocurrency regulation. Initially, this entity could establish best practices for spot platforms, including setting minimum standards of fitness for their employees. Eventually, it could enforce rules on its own membership, supervise them for compliance, and provide a forum for customers to seek redress against member platforms, just like FINRA and NFA do for the securities and derivatives markets today. An SRO-like, independent regulatory body could create uniform standards for these trading platforms, reduce the possibility of regulatory arbitrage, and avoid duplicative regulation.”

A Self-Regulator Organization (SRO) is a creation of the government but operates as an independent regulator.

The Financial Industry Regulatory Authority (FINRA), which regulates trading on the NYSE and NASDAQ is an example of an SRO in the trading industry; the American Medical Association (AMA) and the American Bar Association (ABA) are examples in other fields.

In his speech, Quintenz also described the CFTC’s history of regulating virtual currency. In 2014, then CFTC Chair Tim Massad first said that virtual currency was a commodity in a hearing; in September 2015, that was formalized in the first enforcement action involving a virtual currency.

That virtual currency, Derivabit, which was deemed by the CFTC to offer futures contracts without properly registering.

A further action against Bitfinex.

As Quintenz noted, that enforcement action also made policy: “The CFTC filed and settled a case against a Hong Kong-based company called Bitfinex. Bitfinex held itself out as a spot exchange where retail customers could buy and sell bitcoin and other virtual currencies. However, the exchange permitted retail customers to purchase bitcoin on a leveraged, margined or financed basis, thereby transforming what might have been vanilla spot transactions into look-alike futures contracts within the Commission’s jurisdiction.

“In the case of Bitfinex, the Commission found that Bitfinex failed to actually deliver the bitcoin to the buyers because Bitfinex held the bitcoin in its own private wallet and retained control of all the ‘private keys’ that permitted access to the wallet. Accordingly, the Commission found that these financed retail commodity transactions did not meet the exception for actual delivery and should have been executed on a registered exchange like any other futures contract. In addition, the Commission determined that Bitfinex should have been registered as a futures commission merchant.

“While I agree with the outcome of the Bitfinex case, it is an example of the Commission making policy through enforcement. Prior to Bitfinex, the CFTC had never before addressed what ‘actual delivery’ means in the context of virtual currencies – although the agency had issued guidance in 2011 about what actual delivery means in the context of physical commodities, like wheat or oil. Therefore, before the Bitfinex case, there may have been some confusion about what constitutes actual delivery for cryptocurrencies. As a general matter, I think the optimal approach to the regulation of incipient, but growing, markets is for the regulator to provide the market with some guidance or even a bright line test that gives some indication of the agency’s interpretation of its regulations and how it might adjudicate certain situations.”

CFTC Chair also appeared in front of Congress this week, where he answered questions about CFTC regulation of virtual currency.

The Blockchain Summit is organized by Chamber of Digital Commerce, and Georgetown University’s Center for Financial Markets and Policy.

It features “global thought leaders from the public and private sectors to discuss key market developments, including initial coin offerings, bitcoin futures and ETFs, trading and investing in cryptocurrencies, smart contracts, legislative and regulatory trends, and more.” according to its website.

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